McGarrett50

McGarrett50
Birthday
July 05
Bio
I'm nobody important and there's nothing uniquely interesting about me. My blog is intended as planting a free market, conservative flag on Salon Island. I want to be a bit provocative and will attempt to present a counter-counter-culture view. The blog name is based on the idea that the 1960's should not be viewed as only a time when the young pushed change against conservative norms. The 60's were as much represented by law and order shows such as Hawaii Five O. Conservative waves continued through the 80's and into this day. Salon tends to represent the desire to overcome the conservative waves. I will playfully join the debate here to see whether I hit the beach or hit the rocks.

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Editor’s Pick
MARCH 15, 2009 8:37PM

Bernanke's Betting Big

Rate: 8 Flag

I just finished watching 60 Minutes with its profile and interview of Federal Reserve Chairman Ben Bernanke.  He confirmed what we all knew: the Fed is printing money to provide capital to at risk financial institutions.

Bernanke

(Picture from Federal Reserve web site)

It is not your old fashioned printing press money.  It is modern money where someone logs into the Fed computer and makes a journal entry that puts money in a private institution's account.  Just like if you turned in a deposit slip for $3,000 dollars and the teller accidentally inputs it as $3,000,000.  If the bank never notices, then your checks clear just fine for a long time.

What to make of this?  Taken at face value, this is actually two bets.

  1. The fed is betting that capitalizing these institutions with new money will help restore confidence so that private money will eventually provide the capital, restoring normal solvency and stable credit markets.
  2. After stabilization, the Fed is betting that it can take the "printed" money back off the books at the right time to avoid the inflation that normally results when money is printed.

These are both big bets.  Which do you think is the bigger risk?

The second one seems the more obvious choice since market timing is one of the hardest things to do.  In effect, the Fed is trying to time the whole economy.  It's hard for me to see how any human being is smart enough to do this.  The odds are they will wait too long and we will get inflation.  The biggest risk is that if the first bet doesn't help the economy then we will have stagflation again like the 1970's.

This is why I am thinking that the riskier bet is the first one.  Here's why:

  • Bernanke admits in the interview that there is private money sitting on the sidelines that could be fueling credit.
  • The explanation offered for why the private money isn't investing more is that they can't tell which players are good investments and which are bad.  This is the potential catch 22.
  • The Fed interventions and non-interventions are disguising the market.  Private money has to wait to see whether the Fed made good decisions or whether the Fed will stop "printing money."

So, the Fed intervention is intended to create a safer environment for private money but short-term at least, it is deterring private money.  As with any non-linear "system," it is almost impossible to predict what set of events will break the current equilibrium/disequilibrium allowing progress (lending and economic growth) or regress (longer recession).

This is all rather depressing isn't it?  Well, there are inklings of good news.  Whenever you see banks rejecting TARP money or paying it back early, even if it is just to keep the government off their backs, then that means private money is willing to take its own risks again.

Therefore, you should root for the rich guys to tell the government to take their money and shove it.  After all, you never really wanted to give them the money anyway.

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I forgot you left coasters who won't get the show till about now I guess. Sorry for spoiling the ending.

But, to continue the spoilers, Rosebud is a sled.
Stellaa, I'm flattered that you sent the music posts on to your daughter. I've picked out a few new ones to do over the coming weeks.

Aaron, my *perception* is that the credit markets are not actually bad at the individual level. I don't know the facts, just a perception. I think this really is a crisis of the big boys. They really don't know that they can trust each other. AND, with the Feds throwing money around in emotional fashion, the big guys with money can't tell when they should step in and play.
I'm very concerned about the staflation possibilities. One thing that might prevent that from happening is the apparent downward pressure on oil prices. If oil were still hanging around $100+ per barrel, I'd be really concerned. That is the difference between now and the late 1970's, I think. Back then, oil seemed to be immune to recessionary downward price pressure.
Stellaa, exuberance, indeed!
Is it my perpetual naivete, or is Bernanke's former employer Goldman Sachs not a major recipient of this newly-printed-backed-by-air money? Can we say "massive conflict of interest"?

How did the "Federal Reserve" (every bit as Federal as Federal Express, mind you) schmooze its way into being able to print money backed by air and then LEND it to the US government? That must be the greatest scam of all time. And has there ever been a Fed Chair that wasn't of The Tribe? Is that a rule?
Excellent post. Rated.

It's also gratifying to see a handful of governors saying no to the Trojan Horses they're being offered.
Since they are now printing money, does that mean the money in my savings account will be worth half as much? rated & watched the interview last night.
GordonO: 'It's also gratifying to see a handful of governors saying no to the Trojan Horses they're being offered.'

Gov. Sanford [R-SC] wanted to use his federal funds to pay off state debt. However, he was told in a letter from Pres. Obama that this is NOT AN OPTION. If he won't use it for its intended purpose, I suppose if he still doesn't want it, he can return it to the Feds and let his people suffer the consequences. I'd love to see his constitutents' reactions if he decides NOT TO ACCEPT the funds. What else can anyone expect from the republican "NO" party? What jerks and their only concern is to make an outstanding name for themselves so they can run against Obama in 2012. I don't think I would care to have that "name" when 2012 rolls around - who could vote for him based on his "Gov. Who Screwed His Constitutents" name?
Aaron, my *perception* is that the credit markets are not actually bad at the individual level...I think this really is a crisis of the big boys. They really don't know that they can trust each other. AND, with the Feds throwing money around in emotional fashion, the big guys with money can't tell when they should step in and play.

Well, we know that credit is tight across the board. Here in Britain lending levels dropped dramatically in the wake of the collapse of Lehman Brothers. The same holds true of the United States. We can also infer that credit is tight in both countries as specific interest rates--i.e. not the Fed rates--are much higher than they were before, despite the Fed rate being cut to zero, effectively. In Britain the same has held true until the past week, when the Bank of England started quantitative easing.

I'm very concerned about the staflation possibilities. One thing that might prevent that from happening is the apparent downward pressure on oil prices...That is the difference between now and the late 1970's, I think. Back then, oil seemed to be immune to recessionary downward price pressure.

Quite right. There's also the added benefit that oil consumption takes up a much smaller percentage of GDP than it did in the 70s.

We can't be sure oil prices won't soar once growth resumes worldwide...that will be based on multiple factors. I, for one, am a tad pessimistic--it's foolish to believe the current low oil prices will hold a few years down the line.

...is Bernanke's former employer Goldman Sachs not a major recipient of this newly-printed-backed-by-air money

Er, I didn't realise Bernanke ever worked for Goldman. On the other hand, both Geithner and Hank Paulson before him were Goldman alums. And Dartmouth alums, like yours truly, but that's neither here nor there, LOL.

Since they are now printing money, does that mean the money in my savings account will be worth half as much? rated & watched the interview last night.

In a word, no...at least not yet. Yes, printing money reduces money's notional value; no, it won't be worth half of what it was worth before. As it is we don't really know how much money the Fed has injected into the economy. In contrast, Britain will pump at least £75 billion and up to £150 billion--i.e. almost 10% of British GDP--in its effort. The European Central Bank, on the other hand, can't take similar action--at least not directly--while the Bank of Japan will probably start doing so soon, and has certainly done it before.

Whenever you see banks rejecting TARP money or paying it back early, even if it is just to keep the government off their backs, then that means private money is willing to take its own risks again.

Can you tell me why, exactly, and not just theoretically, rejecting government TARP cash is good in practice? Can you give me an actual reason why TARP funds are detrimental to the economy? In any case, 'keeping government off banks' backs' doesn't seem to be motivating them from dumping heaploads of dodgy assets off their banksheets.

You're sticking to prescriptions that are more concerned with defending an ideology than they are working in practice. It's a pity, especially when you're way off the mark in describing what is really going on anyway.

As for Governor Sanford--he is trying to score political points at a time when adherence to ideology is counterproductive.
isn't it funny how socialists are responsible money managers, and capitalists act like children in an unsupervised candy store. right now at marx's table, deng is telling mao "i told you so", and mao is saying, "wait 20 more years and china will be making the same mistakes."
Procopius,
Yes, high oil prices would make things worse. I hope I don't worry you too much more but I think there is a risk of higher proces because oil is denominated in dollars. So, inflationary pressures that drop the value of the dollar relative to other currencies will drive up the price of oil (this was part of last year's spike). Inflation tends to follow money-printing. It's an extra risk.

Aaron,
The small bank thing may be a real mixed bag. Some of it probably is as you describe. My more optimistic side (yes, I have one) is that smaller banks have tended to not play in the security and derivative markets as much. So, when they made real estate loans, it was for the purpose of having a valuable loan on the books. Hopefully, they did a better job of selecting borrowers precisely because they wanted to loan as the asset and not just a pass-through commission.

The end result is that smaller banks may both be able to keep lending to individuals and getting liquidity support from big banks because the big boys can see which of the small banks have good balance sheets and therefore can be more confident in lending.

I will therefore end with some agreement with you. If student loans do become a problem even for solid borrowers, then that could well be a signal that the small banks aren't confident either. I guess I am thinking this won't happen. Just an opinion...
al,
I'll bite. Who are the socialists and who are the capitlists in your mini-drama?
McGarrett: As you pointed out- the root of the problem is that there is a lot of private money sitting idle. Like a bunch of kids standing next to the pool. None of them wants to jump in unless someone else jumps in first. I'll jump if you jump first. No-I'll jump if you jump first. So you tell me- what's the solution here? Keep waiting while the economy keeps collapsing?
Bernanke's solution is actually a stupid, timid solution. If we weren't so afraid of so-called 'socialism'- we could easily just confiscate the private money and start spending it (Frankly just the threat of doing that will light a fire until the capitalists' a$$ and get them spending again).
Ice, in a way, yes, I think the best thing is for the Feds to stop doing things. My personal belief is that part of the reason the economy tanked so much in Q4 was because Bush/Bernanke/Obama and Paulsen/Geithner scared the crap out of everybody and started throwing money around forcing the normal vulture-capital types to sit on their powder rather than buy out failing companies.

And, yes, Geithner was knee-deep in this from day one. Here's a nice timeline from a left-wing blog.

http://www.openleft.com/showDiary.do?diaryId=12270